Chris Lau - Seeking Alpha

Tuesday, March 17, 2009

About Last Week's 9%+ Rally

Below is a highlight from John Mauldin's weekly newsletter. My highlights are the bolded text.

So, I know a lot of you have stayed in the market the whole time it has been falling and are now wondering what to do. If you have a ten-year time horizon you probably can buy here and do OK. But I wouldn't. I think this market is going to have more problems as we confront the real possibility that we will get some really poor earnings for the first and second quarters. The economy is simply weak, and that weakness is hitting more and more companies. From exporting companies to the big international firms, a global slowdown is hitting almost everyone. Even hospitals are being challenged. We could see a real bear market rally lure investors back in, just to crush their hopes this summer.

Markets go from high valuations to low valuations and back again over long periods of time. I believe that we have a long time to go in the current secular bear cycle. As I have written for years, this one began in 2000 and could last until the middle of the next decade. While we will see a "bottom" in stock prices at some point, maybe even this year, we have a long way to go to get to a really low P/E.

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore

The opportunity cost of the safety in holding cash is, well quite frankly, a rising market to the tune of 9%. Mauldin seems to suggest that a secular bear market stock market rally is underway. It may perist into the summer.

In portfolio management, a manager would be pressured to keep assets invested. Maintaining a high cash position will result in underperformance when the stock market improves. Conversely, a portfolio's value will have less downside if the market continues to fall. I remain conservatively positioned for one simple reason: the banking system is not functional (see LIBOR spreads). The market is rallying as if this system will be fixed very soon.

I do not see fixes for the global banking sector to happen overnight. It will take time. As a result, good entrepreneurial companies in need of raising money to continue its business will hurt. These are the companies to buy. Poor companies who bought other companies at high prices incurred high debt. They now need to raise money to continue operations, but are unable to do so. These are the companies to sell or bet against.